Giffen Good Definition - Investopedia

Giffen goods are non-luxury items that generate higher demand when prices rise, creating an upward-sloping demand curve contrary to standard laws of demand. Economics Microeconomics WhatIsaGiffenGood? AGiffengoodisalowincome,non-luxuryproductthatdefiesstandardeconomicandconsumerdemandtheory.DemandforGiffengoodsriseswhenthepricerisesandfallswhenthepricefalls.Ineconometrics,thisresultsinanupward-slopingdemandcurve,contrarytothefundamental lawsofdemandwhichcreateadownwardslopingdemandcurve.  Theterm"Giffengoods"wascoinedinthelate1800s,namedafternotedScottish economist,statistician,andjournalistSirRobertGiffen.TheconceptofGiffengoodsfocusesonalowincome,non-luxuryproductsthathaveveryfewclosesubstitutes.GiffengoodscanbecomparedtoVeblengoodswhichsimilarlydefystandardeconomicandconsumerdemandtheorybutfocusonluxurygoods. ExamplesofGiffengoodscanincludebread,rice,andwheat.Thesegoodsarecommonlyessentialswithfewnear-dimensionalsubstitutesatthesamepricelevels. 1:13 GiffenGood UnderstandingGiffenGoods Giffengoodsareararityineconomicsbecausesupplyanddemandforthesegoodsareoppositeofstandardconventions.Giffengoodscanbetheresultofmultiplemarketvariablesincludingsupply,demand,price,income,andsubstitution.Allofthesevariablesarecentraltothebasictheoriesofsupplyanddemandeconomics.ExamplesofGiffengoodsareastudyintheeffectsofthesevariablesonlow-income,non-luxurygoodswhichresultinanupwardslopingdemandcurve. KeyTakeaways AGiffengoodisalow-income,non-luxuryproductforwhichdemandincreasesasthepriceincreasesandviceversa.AGiffengoodhasanupward-slopingdemandcurvewhichiscontrarytothefundamentallawsofdemandwhicharebasedonadownwardslopingdemandcurve.DemandforGiffengoodsisheavilyinfluencedbyalackofclosesubstitutesandincomepressures.VeblengoodsaresimilartoGiffengoodsbutwithafocusonluxuryitems. SupplyandDemand Thelawsofsupplyanddemandgovernmacroandmicroeconomictheories.Economistshavefoundthatwhenpricesrise,demandfallscreatingadownwardslopingcurve.Whenpricesfall,demandisexpectedtoincreasecreatinganupwardslopingcurve.Incomecanslightlymitigatetheseresults,flatteningcurvessincemorepersonalincomecanresultindifferentbehaviors.Substitutionandthesubstitutioneffectcanalsobesignificant.Sincetherearetypicallysubstitutesformostgoods,thesubstitutioneffecthelpsstrengthenthecaseforstandardsupplyanddemand. InthecaseofGiffengoods,theincomeeffectcanbesubstantialwhilethesubstitutioneffectisalsoimpactful.WithGiffengoods,thedemandcurveisupwardslopingwhichshowsmoredemandathigherprices.SincetherearefewsubstitutesforGiffengoods,consumerscontinuetoremainwillingtobuyaGiffengoodwhenthepricerises.Giffengoodsareusuallyessentialitemsaswellwhichthenincorporatesboththeincomeeffectandahigherpricesubstitutioneffect.SinceGiffengoodsareessential,consumersarewillingtopaymoreforthembutthisalsolimitsdisposableincomewhichmakesbuyingslightlyhigheroptionsevenmoreoutofreach.Therefore,consumersbuyevenmoreoftheGiffengood.Overall,boththeincomeandsubstitutioneffectsareatworktocreateunconventionalsupplyanddemandresults. HistoricalResearchandGiffenGoodExamples InhistextbookPrinciplesofEconomics,economistAlfredMarshalldescribedRobertGiffen’sworkinthecontextofbreadrisinginpricebecausepeoplelackedtheincometobuymeat.However,in1947,themeat-breadexamplewaschallengedbyGeorgeJ.Stiglerinhisarticle"NotesontheHistoryoftheGiffenParadox."AnotherexampleoftheexistenceofaGiffengoodwasofferedbya2007studyauthoredbyHarvardeconomistsRobertJensenandNolanMiller,whoconductedafieldexperimentintheHunanprovinceofChina,wherericeisadietarystaple,andintheGansuprovince,wherewheatisthestaple.Randomlyselectedhouseholdsinbothprovincesweregiven vouchers thatsubsidizedthepurchaseoftheirrespectivestaplefoods. JensenandMillerfoundstrongevidenceofGiffenbehaviorexhibitedbyHunanhouseholdswithrespecttorice.Loweringthepriceofricethroughthesubsidycausedreduceddemandbyhouseholdsforthericewhileincreasingthepricebyremovingthesubsidyhadtheoppositeeffect.However,theevidenceofwheatinGansuwasweaker. GiffenGoodsvs.VeblenGoods BothGiffengoodsandVeblengoodsarenonordinarygoodsthatdefystandardsupplyanddemandconventions.WithbothGiffenandVeblengoods,aproduct’sdemandcurveisupwardsloping.IncomeandsubstitutionarekeyfactorsinexplainingtheeconometricsoftheupwardslopingdemandcurveforGiffengoodsasdiscussed. Veblengoodsalsohaveanupwardslopingdemandcurvebutwithsomeslightlydifferentinfluences.Veblengoodsarepremiumproduct,luxurygoods.Examplescanincludecelebrity-endorsedperfumesorfinewines.Withthesegoods,theirhighpriceisassociatedwithahighsocialstatussymbol.Assuch,high-incomeconsumersfindthesegoodsmoredesirableatahigherprice.Theincomeeffecthaslittleimpactonthesegoodsbecauseincomeisnotafactor.Substitutionisalsoaminimalfactorbecausethegoodsaregenerallystatussymbolsandnotcross-dimensional. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. RogerS.Mason."RobertGiffenandtheGiffenParadox,"Pages121-126.Barnes&NobleBooks,1989. HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Page1. HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Abstract,Page1. HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Page5. TheNewPalgraveDictionaryofEconomics."Giffen'sParadox:Abstract." TheJournalofPoliticalEconomy."NotesontheHistoryoftheGiffenParadox,"Pages152–153, HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Pages1-4. HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Abstract. HarvardUniversity."GiffenBehavior:TheoryandEvidence,"DownloadPDF,Abstract,Page6. UniversityofVirginia."TheTheoryoftheLeisureClass:ChapterFour:ConspicuousConsumption." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms VeblenGood Veblengoodsaregoodsthatareperceivedtobeexclusiveaslongaspricesremainhighorincrease. more DemandTheoryDefinition Demandtheoryisaprinciplerelatingtotherelationshipbetweenconsumerdemandforgoodsandservicesandtheirprices. more DemandCurve Thedemandcurveisarepresentationofthecorrelationbetweenthepriceofagoodorserviceandtheamountdemandedforaperiodoftime. more UnderstandingtheLawofSupplyandDemand Thelawofsupplyanddemandexplainstheinteractionbetweenthesupplyofanddemandforaresource,andtheeffectonitsprice. more QuantitySuppliedDefinition Thequantitysuppliedisatermusedineconomicstodescribethenumberofgoodsorservicesthataresuppliedatagivenmarketprice. more WhatIsanInferiorGood? Aninferiorgoodisagoodwhosedemanddropswhenpeople'sincomesrise;"inferior"indicatesaffordability,notquality. more PartnerLinks RelatedArticles Economics Arethereanyexceptionstothelawofdemandineconomics? Microeconomics Howdoespriceelasticitychangeinrelationtosupplyanddemand? 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